Sixth IMF-JAPAN High Level Conference for

Asian Countries.

Tokyo

7-9 th April, 2015

Indian Presentation

By

Ashish Kumar

Director

Tax Policy &Legislation

International Taxation-Issues and Challenges

SOME EMERGING ISSUES

Digital Economy

Characterisation of Income

Attribution of profits

Capital Gains – Indirect Transfer

DIGITAL ECONOMY

DIGITAL ECONOMY-PE

New business models -

• have made brick and mortar concept of fixed place PE outdated.

• have engaged several key players in an average global commercial

transaction

• have led to income generation in the hands of key players in

multiple geographical locations

• have created a blur to the single point of reference in the

traditional model wherein the management / factory / office /

technology were identifiable

• have made ‘physical presence’ redundant

The above have made it complex to ascertain the geographical

location of the PE. 5

DIGITAL ECONOMY :

No longer a seller – buyer transaction

• Key Players :

– Network Provider

– Internet Service Provider (ISP)

– User

– Website

– Payment Providers

– Payment System Provider

– Software Architect

– Advertiser

– Content Provider

– Back End System

6

DIGITAL ECONOMY-

RESIDENTIAL STATUS

• In the E-commerce/E-Business / Multiparty

business era,

– it is possible to hold a board meeting with directors

in more than one places

– the company’s effective place of management can

either exist in more than one location, or render the

same incapable of being pinpointed to a specific

location.

This could pose difficulties in determination of tax

residency and place of effective management . 7

DIGITAL ECONOMY: TAXATION CHALLANGES

• The existing definition of PE which gives

prominence to fixed place of business is 100

years old and needs to be synchronised with

the increasing mobility in the business,

particularly Digital Economy.

• There is need to re-examine the right of

source countries to tax in this era of digital

economies.

8

DIGITAL ECONOMY :

SOME ANSWERS

• Expanding the scope of agency PE

• Treatment of franchise / distributor agent as dependent

agency PE of multi layered marketing companies

• Treatment of Indian subsidiary / distributor agent

generating Income from Interactive Financial

Information Network Services for the foreign principal

• Treatment of distributor / subsidiary / dealer of a

foreign auto manufacturer as a PE

9

CHARACTERISATION OF INCOME

• Tax payers claim :

No Royalty as consideration claimed to be for sale of goods no transfer of rights business income no PE and hence, no tax

• Revenue’s Position

Sale of rights not goods, hence royalty

Characterization of Income : Royalty V/s Business

11

Characterization of software payment as ‘Royalty’ – Amendment in Law

● Domestic law has been amended to provide that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of a license) irrespective of the medium through which such right is transferred.

● It has lead to characterization of payments towards use of computer software as ‘royalty’ under the domestic tax law retrospectively.

● Position of amendment vis-a – vis Treaty definition.

12

• Asset transferred by an entity in a jurisdiction where capital gain is exempt under DTAA:

An entity subscribing to debt / hybrid instrument of an Indian entity - as per terms and conditions agreed, the instrument to be redeemed at a premium based on interest- capital gain or interest income?

Tax payer’s claim : Capital gain hence exempt

Revenue’s Position : Income relates to debt instrument based on interest, hence taxable as Interest.

Characterization of Income : Dividend / Interest V/s Capital Gains

13

ATTRIBUTION OF PROFITS

Apparent vs Real state of business

• Criticality of functions performed in India are either suppressed or underreported.

• Place of effective management.

• Ability to collect information from outside the country limited which is exploited by the MNCs.

• Substantial income neither reported nor taxes paid in any of the jurisdiction globally.

15

Attribution of Profit : Challenges

• The basic problem in attribution of profit revolves around allocation of the profits on the basis of the functional analysis.

• There are no robust guidelines internationally as to how to allocate the profits on the basis of functional analysis in the cases where transfer pricing provisions are not applied.

• The attribution of profit is more challenging in cases involving composite contracts for following reasons:

– Artificial splitting of composite contract

– Non transparent allocation of revenue to artificially split contracts.

– Offshore supplies.

.

16

Capital Gains – Indirect transfer

Overseas transactions Ultimate Hold

Co

Indian Operating Co

O/S

Intermediate Co

SPV

Isle of Man

Cayman Islands

Mauritius

India

100%

100%

Sought to be covered

18

Overseas transactions – Income-tax Act to cover indirect transfer of

capital asset being shares or interest in a foreign entity deriving its value substantially from assets in India.

– Reporting obligations on Indian concern through which the assets are held in India.

-Tax deduction obligation whether or not non-resident transferor has any India presence

19

Thank you